be seen Economic expert, Mohamed El-Erian. The reference to the pursuit of a goal while being quietly directed to a different direction is an old tactic in politics, pointing out that the US Federal Reserve may now have to consider such a deceptive maneuver during the year 2023.
El-Erian is among the few people who understand financial markets or central banking in depth, having served as Chief Economic Adviser at Allianz, President of Queen’s College, Cambridge, and author of several books, including most recently The Only Game in Town: Central Banking, Instability, and Recovery from a Collapse else”.
Until 2014, he was CEO of giant asset management company PIMCO, the world’s largest bond manager.
El-Erian wrote in an article for the Financial Times that since 2012, the Fed has publicly and explicitly committed to an inflation target of 2%, noting that the 2% target originated in New Zealand in 1990 and gradually spread to many other developed countries.
He considered the target high enough to allow for the price adjustments needed to reallocate the desired resources to the economy, while avoiding the trap of the zero lower bound, pointing out that, as he believed, it was no longer possible to cut interest rates to stimulate the economy.
El-Erian said that for a while now, inflation has been significantly above the Fed’s target, while the personal consumption expenditures (PCE) price index, his preferred measure of inflation, has fallen in recent months, but remains 3 times above the target.
According to what Al-Erian wrote, which Al-Arabiya.net viewed, “what is also of concern is the shift in the inflation process, as energy and food prices no longer dominate it, but the drivers of inflation increasingly come from the services sector.”
American jobs
Within this sector, the latest monthly US jobs data showed wages rose 0.6% in November, twice the consensus forecast, and lifted the steadily increasing 3-month moving average to 6%.
This exponential wage growth was accompanied by strong monthly job gains.
Job vacancies remain consistently high, outstripping the number of unemployed by a factor of 1.7 amid declining labor force participation.
Combined with input price inflation which is declining more slowly than consensus expectations, only the services sector is concerned that inflation may continue to outpace the Fed’s already revised forecasts.
There are others, too, including changing global supply chains, and the changing nature of globalization and the energy transition.
Of course, the Fed is still playing catch-up to tame price hikes after last year’s protracted aggregate mischaracterization of inflation as “temporary” and its initially timid steps to withdraw monetary stimulus.
core inflation
El-Erian predicted that instead of inflation declining to 2-3% by the end of 2023, it is likely that core inflation of personal consumption expenditures in the United States will stabilize at about 4% or more, indicating that this is what happens when an inflationary moment is allowed to pass in the system. The economist.
The world’s most powerful central bank now faces two unpleasant choices in 2023: crush growth and jobs to reach its 2% target or align with a higher inflation target and risk a new round of unstable inflationary expectations.
Of course, the suitability of the 2% inflation target itself is problematic, El-Erian said, adding that it is not at all clear that the Fed would choose it if it started again today.
He explained that an eventual target of 3-4% is likely to be more likely, given the supply-side liquidity, energy transition, required resource reallocation, and of course the experience with zero floor inflation over the past decade.
Given all this, El-Erian continued, it may be tempting for the Fed to continue to indicate a 2% inflation target, but in practice, they end up pursuing a higher target in the hope that over time the public will accept it as a superior and already stable target.
El-Erian believes that, of course, this is far from an optimal approach, as it is difficult to withdraw halfway, as it involves sensitive ethical issues that may raise more questions about the Fed’s accountability, credibility, and independence.
financial fragility
However, given the extent of economic uncertainty and financial fragility, the Fed may end up thinking that this far from perfect policy approach may be the best course of action.
Al-Arian recalled that a friend of his once told him that an initial set of bad decisions often makes it very difficult to quickly return to the optimal place despite good intentions and efforts to do so.
This is the trap the Fed fell into not only because of its policy mistakes in 2021-22, but also because of its over-reliance on unorthodox policies in the decade before that, he said.
“Unfortunately for all of us, the road from here isn’t going to get much easier anytime soon even though inflation is down,” he added.